FINAL REVIEW OUTLINE: CONTRACTS & SALES
I.
Formation of Contracts (Ks)—binding K requires mutual assent, consideration, and lack of valid
defenses
A. Offer—objective manifestation of a willingness by offeror to enter into agreement that creates
power of acceptance in offeree
1.
Intent—a statement is an offer only if:
•
Person to whom it is communicated could reasonably interpret it as an offer
•
Expresses present intent of a person to be legally bound by a K
2.
Knowledge—offeree must know of the offer in order to have the power to accept
3.
Terms—must be certain and definite or the K fails for indefiniteness
•
Under common law (CL)
o Essential terms (parties, subject matter, price, quantity) must be covered in K
o If the parties intended to create a K, the court may supply missing terms
•
Under UCC
o Only essential term is quantity

Exception—requirements or output Ks (UCC implies “good faith”)

UCC “fills the gap” if other terms are missing
o K formed if both parties intend to K and reasonably certain basis for giving remedy
4.
5.
Language—offer must contain words of promise, undertaking, or commitment, and be
targeted to a number of people who could actually accept
•
If a return promise is requested—bilateral K
•
If an act is requested—unilateral K
Invitation to deal—advertisements are only an invitation to receive offers (but may
qualify as an offer if sufficiently specific and limit who can accept or if associated with a
stated reward)
B. Termination of offers
1.
Lapse of time—specified termination date or reasonable period of time if none stated
2.
Death/mental incapacity of offeror
•
General rule—offer terminates, even if offeree does not learn of offeror’s death until
after the offeree has sent what he believes is an acceptance
•
Exception—offers for option Ks do not terminate because consideration was paid to
keep the offer open
3.
Destruction/illegality—offer terminated
4.
Revocation
•
Offer can be revoked any time prior to acceptance (even if it states it will be open for
specific amount of time)
•
Not effective until communicated
•
Revocation sent by mail not effective until received
5.
Limitations on revocation
•
Option K—offeree must generally give consideration for option to be enforceable
•
UCC firm offer rule
o Offer irrevocable (for reasonable time but no more than three months) if offeror is a
merchant (or any business person), and assurances (in authenticated writing) are
made that offer will remain open
o No consideration needed to keep offer open
•
Promissory estoppel—if offeree reasonably and detrimentally relies on offer it may
become irrevocable
•
Partial performance—for all Ks, offeree must have knowledge of offer when
performance begins
o Unilateral K—offeror cannot revoke once offeree has begun performance
o Bilateral K—commencement of performance operates as promise to render
complete performance
6.
Revocation of general offers (to large number of people)—revocable only by notice
given at least same level of publicity as offer (effective even if potential offeree acts in
reliance on offer)
7.
Rejection by offeree
•
Offeree clearly conveys to offeror that he no longer intends to accept the offer
•
Rejection usually effective upon receipt
•
Counteroffer—acts as rejection of original offer and creates new offer
C. Acceptance—objective manifestation by the offeree to be bound by the terms of the offer
1.
Bilateral v. unilateral
•
Bilateral K
o Exchange of promises that render both enforceable
•
Unilateral K
o Promise to do something by one party in return for an act of the other party
o Starting to perform is not enough, but it will make offer irrevocable for a reasonable
period of time to complete performance
o Offeree must be aware of offer before acting
2.
Means of acceptance—unless offeror specifies, offeree can accept in any reasonable
manner/means
•
Silence—is not acceptance unless offeree has reason to believe offer could be
accepted by silence or previous dealings make it reasonable to believe that offeree
must notify offeror if he does not intend to accept
•
Shipment of goods
o Buyer’s request that goods be shipped is inviting acceptance either by seller’s
promise to ship or by prompt shipment of goods
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o Nonconforming goods shipped—both an acceptance and a breach, unless seller
seasonably notifies buyer that goods are an accommodation (counteroffer); buyer
may then accept or reject the nonconforming goods
3.
4.
Mailbox rule (applies only to acceptance; almost exclusively applies to bilateral Ks)
•
Acceptance—effective when sent (not upon receipt), unless offer provides otherwise
•
Rejection following acceptance—acceptance will control even if offeror receives
rejection first (but if offeror detrimentally relies on rejection then offeree estopped
from enforcing K)
•
Acceptance following rejection—mailbox rule does not apply; first one received
(i.e., in possession of offeror or her agent, or deposited in mailbox) will prevail; offeror
need not actually read the received communication
•
Revocation—effective upon receipt
•
Options and other irrevocable offers—mailbox rule does not apply; acceptance
must be received by offeror by a certain date or before offer expires
Notice
•
Unilateral K
o Offeree not required to give notice after completing performance, unless:

Offeror wouldn’t learn of performance with reasonable certainty and
promptness; or

Offer requires notice.
o Notice required but not provided—offeror’s duty is discharged, unless:
•

Offeree exercises reasonable diligence to give notice;

Offeror learns of performance within reasonable time; or

Offer indicates notice of acceptance is not required.
Bilateral K—offeree must give notice of acceptance
o Mailbox rule—acceptance valid when sent (even though offeror hasn’t received it)
o UCC—if acceptance is made by beginning performance, notice is required within a
reasonable time; failure to give notice results in offer’s lapse
D. Additional or different terms
1.
CL mirror-image rule—acceptance must mirror the terms of the offer, so any change or
addition to the terms acts as a rejection and a new counteroffer
•
2.
Conditional acceptance terminates the offer and acts as new offer from original offeree
UCC (no mirror-image rule)—acceptance containing additional or different terms generally
treated as acceptance
•
One or both parties not merchants—definite and seasonable expression of
acceptance sent within a reasonable time is usually acceptance of original offer, and
new/different terms are treated as proposed additions to the K that must be separately
accepted by offeror
o Exception—an acceptance expressly conditioned on assent to new/different terms is
treated as a counteroffer
•
Both parties are merchants (battle of the forms)
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o Additional terms—automatically included in the K, unless:

Term materially alters original K (i.e., would result in surprise or hardship);

Offer expressly limits acceptance to terms of the offer; or

Offeror objects to new terms within a reasonable time after notice of new
terms is received.

If one of these exceptions is met, original terms of offer control
•
Different terms (“knock-out” rule)—different terms in offer/acceptance nullify each
other, and court uses Article 2’s gap-filling provisions to patch holes in K
•
Acceptance based on conduct—if offer and purported acceptance differ too much
to create a contract but the parties begin to perform anyway, then UCC allows for a
contract to be recognized with the following terms:
o Any terms actually agreed upon in the parties’ writings, and
o Any supplementary terms filled in by the UCC
E. Consideration
1.
Bargain and exchange—must be a bargained-for legal detriment to the promisee
•
Legal detriment and bargained-for exchange
o To constitute sufficient consideration, must be bargained-for in exchange for the
promise, promise must induce the detriment, and detriment must induce the
promise
o Consideration can be return promise to do or refrain from doing something, or
performance of or refraining from doing some act
•
Gift
o Test to distinguish gift from valid consideration is whether offeree could reasonably
believe intent of offeror was to induce the action (if YES, then there is consideration
and promise is enforceable)
o Promissory estoppel—if promisor/donor knows that promise to make a gift will
induce substantial reliance by promisee and failure to enforce it would cause
substantial injustice, promise is enforceable
2.
Adequacy of consideration
•
Subjective value—benefit to promisor need not have economic value; if promisor
wants it, giving of it will constitute adequate consideration
•
Preexisting duty rule
o CL—does not qualify as consideration unless promisor gives something in addition
to what is owed, or varies preexisting duty in some way
o Exception for third party—third-party promise contingent upon performance of
another party’s contractual obligation is sufficient consideration
•
Past consideration—modern trend towards enforcing past promises under the
material benefit rule
•
Modification
o CL—must be supported by consideration, and agreements to modify K are
enforceable if:
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
Rescission of existing K and entering into of new K

Unanticipated difficulties arise and modification is fair and equitable, or

New obligations arise on both sides
o UCC
•

Requires only good faith

No consideration is necessary
Accord and satisfaction
o Accord—one party agrees to accept a different performance from the other party to
satisfy the other party’s existing duty
o Satisfaction—performance of the accord agreement will discharge both the original
K and the accord K
o Original K not discharged until satisfaction is complete
o An unliquidated or disputed claim may be discharged by negotiable instrument
(e.g., a check with the note “Payment in full”)
•
Illusory promise—not legally binding because it is vague or promisor can choose
whether or not to honor it
•
Voidable/unenforceable promises—can still constitute consideration
•
Requirements (buyer agrees to buy all that he requires) and output (seller agrees to
sell all that she manufactures) Ks
o There is consideration because promisor suffers legal detriment
o Quantities may not be unreasonably disproportionate to estimates
•
Legal claim settlement—a promise not to assert (or a release of) a claim or defense
is not consideration, unless the claim or defense is doubtful or the party promising not
to assert (or releasing) the claim believes in good faith that it is valid
F. Promises binding without consideration
1.
Pay a debt barred by statute of limitations (SoL)—new promise to pay debt after SoL
has run is enforceable without new consideration
2.
Perform voidable duty—new promise to perform voidable duty is enforceable if it
doesn’t suffer from an infirmity rendering it voidable
3.
Material benefit rule—when a party performs an unrequested service for another party,
the modern trend permits the performing party to enforce the promise of payment for
material benefits received to extent necessary to prevent injustice (unless donative intent)
4.
Promissory estoppel (consideration “substitute”)—a promise is binding if:
•
Promisor should reasonably expect it to induce action on the part of the promisee or a
third person
•
Promise does induce such action, and
•
Injustice only avoided by enforcement of promise
G. Enforceability—a defense to formation or a defense to enforcement may render K void,
voidable, or unenforceable
1.
Void Ks—entire transaction is null, as if no K existed
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2.
Voidable Ks—operates as valid K until/unless one party takes steps to avoid it
3.
Unenforceable Ks—valid K that cannot be enforced if one party refuses to carry out its
terms
H. Defenses to formation—no “meeting of minds” due to mistake or misunderstanding,
misrepresentation or fraud, undue influence or duress, or lack of capacity
1.
Mistake
•
Mutual
o Both parties mistaken as to essential element
o K generally voidable by party adversely affected if:

Mistake existed when K was formed

Mistake relates to basic assumption of K

Mistake has material impact on transaction, and

Adversely affected party did not assume the risk of mistake
o Neither party can avoid K if reformation available to cure mistake
•
Unilateral
o One party is mistaken as to essential element of K, but either party can enforce K
on its terms
o Mistaken party can void K if he didn’t bear risk of mistake and either:

Mistake would make enforcement of K unconscionable, or

Non-mistaken party caused the mistake, had duty to disclose or failed to
disclose mistake, or knew or should have known the other party was mistaken
o Must be absence of serious prejudice to other party to rescind K
•
Reformation (mutual mistake)
o Court can reform writing except to extent that rights of third parties who relied on K
would be unfairly affected
2.
3.
Misunderstanding—both parties believe they are agreeing to same material terms, but
they in fact agree to different terms
•
Neither party knows or has reason to know—no K if material term involved
•
One party knows or has reason to know—K formed based upon meaning of
material term as understood by unknowing party
•
Both parties know terms ambiguous at time of K formation—no K unless both
parties intended same meaning
•
Waiver—one party can choose to enforce K according to other party’s understanding
•
Subjective determination of misunderstanding—each party’s knowledge or
reason to know of the misunderstanding governs (i.e., not what a reasonable person
would know)
Misrepresentation—an untrue assertion of fact (i.e., present event or past circumstance)
•
Fraudulent misrepresentation—requires proof that:
o The misrepresentation is fraudulent:

Knowing or reckless false assertion of fact
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
With intent to mislead
o The misrepresentation induced assent to the K, and
o Justifiable reliance on the misrepresentation by the adversely affected party
•
Nondisclosure—conduct to conceal a fact or nondisclosure of a known fact is
tantamount to an assertion that the fact does not exist
•
Effect
o Fraud in the factum (execution)—fraudulent misrepresentation prevents party from
knowing character/essential term of transaction, so no K is formed and apparent K
is void unless reasonable diligence would have revealed K’s true terms
o Fraud in the inducement—fraudulent misrepresentation is used to induce another to
enter into a K; K voidable by adversely affected party if she justifiably relied on the
misrepresentation
4.
•
Nonfraudulent misrepresentation (innocent/negligent)—renders K voidable by
adversely affected party who justifiably relied on material misrepresentation and was
induced to assent to K because of it
•
Effect of party’s fault—a party’s fault in not knowing or discovering facts before
entering into the K does not prevent the party’s reliance on the misrepresentation from
being justified (unless it constitutes a failure to act in good faith)
•
Cure of misrepresentation—K not voidable if facts cured before deceived party has
avoided the K
•
Avoidance/reformation for misrepresentation—when content/legal effect of K is
misrepresented, deceived party can avoid K or reform it to express what was
represented
Undue influence—unfair persuasion of a party to assent to a K
•
Unfair persuasion
o Relationship between dominant party and dependent party due to lack of expertise
or experience, or diminished mental capacity
o Persuasion of one party seriously impairs the free and competent judgment of other
party
5.
•
Confidential relationship—dominant party has burden of proving K was fair (may be
held to higher standard of disclosure)
•
Third party undue influence—victim may void K unless nonvictim party to K gave
value or materially relied on K in good faith and without knowledge of undue influence
•
Damages—restitution available
Duress—improper threat that deprives party of meaningful choice
•
Improper threat
o Threats of criminal or civil action (made in bad faith), or
o Threats to breach K in violation of good faith and fair dealing
•
Deprivation of meaningful choice—person has no reasonable alternative such that
threat induced his assent
•
Effect on K—K is void when duress is through physical compulsion and voidable in
other instances
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6.
I.
Capacity to K
•
Infancy (under 18)—voidable by infant but not by adult (except for reasonable
value of necessaries)
•
Mental illness—K is void for one who is adjudicated mentally incompetent, but only
voidable if there has been no adjudication
•
Guardianship—K is void for individuals under guardianship (except for reasonable
value of necessaries)
•
Intoxication—K is voidable by intoxicated party if she was unable to understand
nature/consequences of K and other party knew of intoxication
Defenses to enforcement
1.
Illegality
•
K is unenforceable if consideration/performance under K is illegal
•
K is void if it contemplates illegal conduct
•
Duty to perform is discharged if K becomes illegal after formation
•
If one party is justifiably ignorant of facts making K illegal or lacks illegal purpose he
can recover (assuming guilt of other party)
•
Exceptions:
o Ignorance of illegality—a party may recover if the party is justifiably ignorant of the
facts making K illegal and the other party had knowledge of the illegality
o Lack of illegal purpose—a party who has substantially performed may recover if:

K does not involve illegal consideration/performance—the party is unaware of
the other party’s illegal purpose

The party knows of the other party’s illegal use—unless the party furthered the
illegal use or the use involves grave social harm
o Divisible Ks—if K can easily be divided into legal and illegal parts, a party may
recover on the legal part(s)
o Licensing violation—depends on the purpose of the licensing requirement:

Regulatory purpose—the party who fails to comply cannot enforce the K

Raise revenue—the party who fails to comply can enforce the K
o Restitution

Not in pari delicto—when parties are not equally at fault, the less guilty party
may recover under restitution

Withdrawal—a party who withdraws from an illegal K before the improper
purpose has been achieved may recover under restitution when the party has
not engaged in serious misconduct
2.
Unconscionability—K is unconscionable when it is so unfair to one party that no
reasonable person in the position of the parties would agree to it (e.g., hidden, complex
boilerplate language, adhesion Ks)
3.
Public policy—K may be unenforceable if it violates significant public policy
J. Implied-in-fact Ks and quasi-Ks
1.
Implied-in-fact—conduct, not words, indicates assent or agreement
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2.
Quasi-Ks—a plaintiff confers benefit on a defendant and the plaintiff has reasonable
expectation of compensation and court implies K to prevent unjust enrichment
•
Requirements:
o Plaintiff conferred measurable benefit on defendant,
o Plaintiff acted without gratuitous intent, and
o Unfair to let defendant retain benefit
K. Warranties in sale-of-goods Ks
1.
2.
3.
II.
Express warranty
•
Any promise, affirmation, description, or sample that is part of the basis of the bargain,
unless it is merely the seller’s opinion
•
Disclaimers—disclaimers that unreasonably negate or limit express warranties are
inoperative
Implied warranty of merchantability
•
Implied whenever seller is a merchant
•
Goods must be fit for their ordinary purpose
•
Warranty can be disclaimed by use of “as is,” “with all faults,” or similar language
•
Disclaimer may be oral, but must use the term “merchantability” and be conspicuous if
in writing
Implied warranty of fitness for a particular purpose
•
Implied whenever seller has reason to know (from any source) buyer has particular use
for goods and buyer is relying on seller’s skill to select the goods
•
Warranty can be disclaimed by conspicuous writing
Discharge
A. Impracticability—replaces CL doctrine of impossibility
1.
2.
Defense available if:
•
Performance becomes illegal after K is made;
•
Specific subject matter of K is destroyed;
•
Performing party to the K dies or becomes incapacitated (personal services K); or
•
Performance becomes impracticable.
Elements:
•
Unforeseeable event has occurred;
•
Nonoccurrence of event was basic assumption on which K was made; and
•
Party seeking discharge is not at fault.
3.
Timing—usually arises after K formation, but a fact making K performance impractical can
exist when K is made if the party has no reason to know of the fact
4.
Assumption of risk—impracticability defense not available to a party who assumes the
risk of an event happening
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5.
6.
Partial impracticability
•
If seller is able to deliver some of the goods, they must be apportioned among all of
the buyers with whom the seller has contracted
•
Buyer may refuse to accept and may cancel K
Failure of a particular source—if K specifically identifies a source, and source of supply
fails, performance is discharged even if other sources are available
B. Frustration of purpose
1.
Applies when unexpected events arise that destroy one party’s purpose in entering into K,
even if performance of K not rendered impossible
2.
Frustrated party entitled to rescind K without paying damages
3.
Unexpected event need not be completely unforeseeable, but must be so severe it’s not
within assumed risks inherent under K
4.
Timing—can arise at the time of K if a party has no reason to know a fact exists
C. Rescission—cancelling of K so as to restore parties to their positions before K was made
1.
Parties may seek to rescind for a variety of reasons but grounds for rescission must have
existed at the time the K was made
2.
Rescission also possible by mutual agreement of the parties—surrender of rights
under the original K is consideration for the rescission
•
Third-party beneficiaries—K not discharged by mutual rescission if third-party
rights have already vested
D. Release
1.
Writing that manifests intent to discharge another party from an existing duty
•
CL—release must be supported by consideration
•
UCC—written waiver or renunciation signed/delivered by aggrieved party is enough
(no consideration necessary)
E. Destruction/damage to identified goods
1.
Destruction—goods identified when K made are destroyed by no fault of either party
before risk of loss passes to buyer; K is avoided, both parties are discharged, and neither
party is in breach
2.
Goods damaged but not destroyed—K avoided or buyer can choose to take goods at
reduced price without any other claim against seller
3.
Risk of loss—if risk of loss has passed to buyer, K is not avoided and seller may demand
performance by buyer
III. Third-Party Beneficiary Contracts—when two parties contract with the understanding and
intent that performance by one of the parties is to benefit a third person
A. Intended and incidental beneficiaries—third party can recover if she is an intended
beneficiary
1.
Intended beneficiary—one to whom the promisee wishes to satisfy an obligation or
otherwise benefit by the promised performance; has the right to bring an action on the K
2.
Incidental beneficiary—one who benefits from a K even though there is no contractual
intent to benefit that person; no right to enforce K
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B. Vesting of beneficiary’s rights—rights of intended beneficiary vest when beneficiary:
1.
Detrimentally relies on rights created;
2.
Manifests assent to K at one of the party’s request; or
3.
Files lawsuit to enforce K.
C. Defenses—promisor can raise any defense against third party that he had against original
promisee
IV.
Assignment of Rights & Delegation of Duties
A. Assignment of rights
1.
Not allowed when it materially increases duty or risk of obligor or materially reduces
obligor’s chance of obtaining performance
2.
Need present intent to transfer the right immediately
3.
If assignment is for consideration, it is irrevocable
4.
Assignee takes all of the rights of assignor as the K stands at time of the assignment, but
she takes subject to any defenses that could be raised against the assignor
5.
A prohibition on assignment does not affect the assignment of rights, but bars delegation
of duties (unless circumstances indicate otherwise)
B. Delegation of duties
1.
Generally allowed, except when other party to K has substantial interest in a specific
individual’s performance (for example, personal services K involving special skill)
2.
When obligations are delegated, delegator is not released from liability, so he is still liable if
delegate doesn’t perform (unless there is a novation)
3.
Delegate’s acceptance of a delegation constitutes a promise to perform the delegated
duties; promise is enforceable if there is consideration or a consideration substitute
4.
Delegation in contracts for the sale of goods may be treated by the other party as creating
reasonable grounds for insecurity; the other party may demand assurances from delegate;
conforming promises by permitted delegates must be accepted
5.
A prohibition on assignment does not affect the assignment of rights, but bars delegation
of duties (unless circumstances indicate otherwise)
C. Assignment of contract—assignments not limited to contractual rights (e.g., “this contract is
assigned to”) are generally treated as both an assignment of rights and a delegation of duties
V.
Statute of Frauds (SoF)
A. Writing required—memorandum must:
1.
Be in writing;
2.
Be signed by the party to be charged (i.e., any authentication that identifies the party);
3.
Contain the essential elements of the deal.
B. Types of Ks within the SoF
1.
Marriage—any agreement in consideration of marriage
2.
Suretyship—K to answer for debt/duty of another
3.
One year—K that cannot be performed within one year after K is made
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4.
UCC—when K for the sale of goods is at least $500, memo must indicate that K has been
made, identify parties, contain a quantity term, and be signed by the party to be
charged
•
Exceptions—writing not required under UCC for:
o Specially manufactured goods,
o Part payment,
o Receipt and acceptance,
o Judicial admission, or
o Failure to object to memo within 10 days of receipt (when both parties are
merchants)
5.
Real property K—applies to Ks providing for subsequent conveyances of an interest in
property (subsequent acts showing existence of K may also make oral Ks for transfers of
interest enforceable)
C. Exceptions
VI.
1.
Promissory Estoppel
2.
Judicial Admissions
Parol Evidence (P/E)—prevents introduction of prior extrinsic evidence that contradicts terms of
written K
A. Integration—parties intended writing to be their final agreement (P/E rule applies)
1.
Total integration (complete expression of all terms of parties’ agreement)—parties
cannot introduce extrinsic evidence of prior/contemporaneous understandings or
negotiations
•
2.
Partial—if writing sets forth only some terms, then parties are permitted to introduce
supplementary extrinsic evidence of other terms that are consistent with writing (not
contradictory)
Intent of the parties—determines if there is total, partial, or no integration
•
CL (“four corners” rule)—can only look to writing itself for intent
•
Second Restatement—if an extrinsic term of agreement would naturally be omitted
from a writing, then term can be introduced so long as it isn’t contradictory
•
UCC—assumes written K is only a partial integration and allows almost any outside
terms
B. When P/E is inapplicable—does not apply to communications occurring after the
execution of the written K and when parties are (partial list):
1.
Raising a defense to formation
2.
Raising a defense to enforcement
3.
Proving condition precedent to existence of the K
4.
Interpreting/clarifying ambiguity in K
5.
UCC—supplementing even apparently unambiguous terms by evidence of trade usage or
course of dealing (priority, highest to lowest: express terms, course of performance, course
of dealing, trade usage)
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VII. Conditions and Performance
A. Condition—future event that must take place before rights or obligations are created,
destroyed, or enlarged
1.
Failure of a condition—relieves a party of the obligation to perform
2.
Express—K includes words like “on the condition that” or “provided that”
3.
•
Condition must be complied with fully unless excused; substantial performance will not
suffice
•
Enforceable even when the failure to meet the condition results in the denial of
compensation
Implied—those deemed to be part of K because agreement suggests that parties truly
intended the condition but failed to expressly include it, or because fairness requires its
inclusion
•
Only substantial performance required to satisfy condition
•
UCC—implies duty of cooperation when performance of one party depends on the
cooperation of the other party
B. Timing of conditions
1.
Condition precedent—condition precedes the obligation to perform
2.
Condition subsequent—condition excuses the duty to perform after a particular event
occurs
3.
Concurrent conditions—each party’s duty to perform is conditioned on the other party’s
duty to perform (each party must perform simultaneously)
C. Satisfaction of conditions—examined against objective, reasonable person standard
unless aesthetic taste is involved (then subjective standard; the party must use good faith
when assessing satisfaction; dissatisfaction must be honest, but may be unreasonable)
D. Performance of contractual duty
1.
2.
Order of performance—unless the language or circumstances indicate otherwise,
performance is due:
•
When one party’s performance requires a period of time—that party must
complete his performance before the other party is required to perform
•
When both parties’ performance can be rendered at the same time—both
parties must perform at the same time; one party’s failure to perform excuses the
other party’s performance
Substantial performance (does not generally apply to Ks for sale of goods)
•
Express condition precedent—parties are generally held strictly to the condition;
full compliance is required before other party’s performance is due
•
Implied or constructive condition precedent—a party who substantially complies
with the condition can trigger the other party’s obligation to perform
•
Damages—K price minus any amount it will cost other party to obtain complete
performance as promised
o Even if no substantial performance, potential recovery through restitution
o Failure to substantially perform is a material breach
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•
3.
Willful breach—more likely to be treated as a material breach (i.e., substantial
performance is less likely to be found when the breach is willful)
Perfect tender under the UCC
•
Seller must transfer ownership and tender goods conforming to warranty
obligations
•
Buyer may inspect goods and, upon acceptance, has an obligation to pay for them
•
Perfect tender rule—substantial performance insufficient (except for installment Ks
and when parties agree)
•
Transferring ownership
o Automatic warranty of good title, rightful transfer, and goods free of security
interest of which buyer is unaware
o Actual knowledge of security interest nullifies warranty of title
•
Seller’s obligation to tender goods—must be in accordance with K provisions or
with UCC if K is silent on tender
•
Method of tender
o Seller’s place of business—seller must place goods at the disposition of the buyer
and give the buyer notice, if necessary
o Shipment contract (e.g., “F.O.B. seller’s place of business”)—seller must deliver
goods to a carrier and make a contract for their shipment; when the K is silent, a
shipment K is presumed when the K requires shipment by third-party carrier
o Destination contract (e.g., “F.O.B. buyer’s place of business”)—seller must deliver
goods to the place specified in contract and tender them there by holding them at
the buyer’s disposition
4.
•
Buyer’s obligations—once conforming tender is made, buyer obligated to accept and
pay K price; rejection amounts to breach of K
•
Buyer’s right to inspect before payment—generally, a right to inspect goods that
are tendered, delivered, or identified to the K for sale, unless K provides otherwise
Divisible or installment Ks
•
CL—various units of performance divisible into distinct parts
o Recovery limited to amount promised for the segment of K performed
o Damages recoverable for breach of other segments
•
UCC—goods delivered in multiple shipments, each to be separately accepted
o Perfect tender rule does not apply
o Right to reject determined by “substantial conformity” standard—buyer can only
reject if nonconformity substantially impairs the value to buyer and cannot be
cured
o Buyer may cancel K only if nonconforming tender substantially impairs the
value of the entire K
5.
Implied duty of good faith and fair dealing
•
Imposed on each party in any contract (common law or UCC)
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•
“Good faith”—“honesty in fact and the observance of reasonable commercial
standards of fair dealing”
E. Suspension or excuse of conditions
1.
Waiver—party whose duty is subject to a condition can waive a nonmaterial condition by
words or conduct; the condition may be reinstated if:
•
The waiving party communicates the retraction of the waiver before the condition is
due; and
•
The other party has not suffered detrimental reliance.
2.
Wrongful interference—if party whose duty is subject to a condition wrongfully prevents
or interferes with occurrence of that condition, then the condition is excused and
interfering party has absolute duty to perform (per implied duty of good faith and fair
dealing)
3.
Election—a party who chooses to continue with a K after a condition is broken effectively
waives that condition
4.
Estoppel—once a party waives condition, he can be estopped from using that condition as
a defense if other party reasonably relied on waiver
VIII. Breach of Contract and Remedies
A. Breach of K—once duty to perform exists, nonperformance is a breach unless duty is
discharged
1.
2.
CL
•
Material breach (nonbreaching party does not receive substantial benefit of
bargain)—allows nonbreaching party to withhold any promised performance and to
pursue remedies for breach, including damages
•
Minor breach (breaching party has substantially performed)—nonbreaching party
entitled to pursue remedies for nonmaterial breach (damages) but must perform under
the K
UCC
•
In general, seller must strictly perform all obligations under K or be in breach
o Material breach only applies to installment Ks or when parties stipulate it in K
B. Anticipatory repudiation
1.
CL
•
Promisor repudiates before time of performance is due—repudiation must be
clear and unequivocal through words or acts
•
Nonbreaching party’s options:
o Treat repudiation as a breach, or
o Ignore repudiation and demand performance of promisor, but suspend any
performance by promisee if it would increase promisor’s damages
o If date of performance has not passed and the only performance left is payment,
must wait for actual breach before filing suit
•
Retraction of repudiation—can be retracted until promisee acts in reliance on
repudiation, accepts repudiation, or commences action for breach of K
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•
2.
3.
Unilateral Ks—anticipatory repudiation does not apply
UCC
•
Anticipatory repudiation occurs when there has been an unequivocal refusal of
buyer/seller to perform or when reasonable grounds for insecurity arise and the other
party fails to provide adequate assurances within reasonable time (not to exceed 30
days)
•
Retraction of repudiation—permitted if other party has not canceled the K or
materially changed position
Prospective inability to perform—party’s expectations of performance may be
diminished by an event occurring after K formation
•
UCC
o A party can demand assurances if reasonable grounds for insecurity about other
party’s ability to perform (and may suspend performance until provided); the
demand must be in writing
o Failure to provide adequate assurances within reasonable time (limited to 30 days)
treated as repudiation
C. Remedies—damages for breach of K
1.
Expectation damages
•
In general
o Intended to put nonbreaching party in same position as if K had been performed
o Must be calculated with reasonable certainty
o Expectation damages = loss in value + other loss – cost avoided – loss avoided
•
Partial performance—partially performing party recovers work performed +
expectation damages for work not yet performed
•
Defective performance
o Construction Ks—damages; generally the cost to correct the defect
o Sale of goods—damages equal to the difference between the value of the goods as
warranted and the actual value of the tendered nonconforming goods
o Real estate—damages for failure to perform = difference between K price and
market value; damages for late delivery = fair market rental value
•
Economic waste—applies to construction contracts
o Occurs when the cost to fix or complete construction is clearly disproportional to
any economic benefit/utility gained as a result; court can award damages equal to
the diminution in the market price of property
o If the breach is willful and only completion of the K will give the nonbreaching party
the benefit of its bargain, court can award damages to fix or complete construction
even if it results in economic waste
•
UCC Breach of warranty damages—difference between the value of the goods
accepted and the value they would have had if they had been as warranted (often,
repair costs)
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2.
Consequential damages and foreseeability
•
Direct damages—necessary and usual result of D’s wrongful act (i.e., “loss of value)
•
Consequential damages—damages that result from the breach, but arise out of
special circumstances unique to the parties to the contract; must be reasonably
foreseeable to the breaching party (but need not be a usual result of D’s conduct),
caused by the breach, and reasonably certain in value to be recovered
•
Foreseeability
o Unforeseeable—not recoverable unless the breaching party had some reason to
know about the possibility of the unforeseeable consequential damages
o Damages are recoverable if they are natural and probable consequences of breach,
or if they were contemplated by the parties at K formation, or if they were
otherwise foreseeable
•
Causation—D’s defense that P’s losses would have occurred regardless of D’s breach
•
Reasonable certainty
o Dollar amount of damages must be proven with reasonable certainty
o If lost profits are too speculative, courts may limit recovery to reliance damages
(reasonable expenditures made in connection with the K)
•
UCC breach of warranty
o Limitation of consequential damages for personal injury in the case of consumer
goods is prima facie unconscionable
o Limitation of damages when the loss is commercial is not prima facie
unconscionable
3.
4.
Incidental damages—compensation for commercially reasonable expenses incurred as a
result of other party’s breach
•
Seller’s breach—expenses incurred in inspection, receipt, transportation, care, and
custody of goods rightfully rejected; expenses in effecting cover; and any other
reasonable expense incident to the delay or other breach
•
Buyer’s breach—any expenses incurred in stopping delivery; in the transportation,
care, and custody of goods after the buyer’s breach; in connection with return or resale
of the goods; or otherwise resulting from the breach
Liquidated damages and penalties—damages stipulated by the parties to the K as a
reasonable estimation of actual damages to be recovered in the event of a breach
•
Enforceable if:
o Parties intended to agree in advance to damages that might arise from breach
o Stipulated amount was reasonable at time of K, bearing some relation to damages
that might be sustained, and
o Actual damages would be uncertain in amount and difficult to prove
5.
Punitive damages—rarely available in K actions but may be available if conduct
constituting breach is also recoverable under tort theory
6.
Nominal damages—when no damages are alleged/proven
7.
Attorney’s Fees—in K, not recoverable absent express agreement or specific law
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8.
Mitigating damages
•
Party to K must avoid or mitigate damages to the extent possible by taking steps that
do not involve undue risk, expense, or inconvenience
•
Nonbreaching party held to standard of reasonable conduct in preventing loss
•
Services K—a party is generally not required to accept any type of employment (only
employment of the same type as the party was contracted to perform)
•
Failure to mitigate reduces damages that may be recovered by nonbreaching party
D. Restitution and reliance recoveries
1.
Restitutionary damages (restores to a party the benefit conferred on the other party)
•
Measured by either the reasonable value of the D obtaining that benefit from another
source, or increase in the D’s wealth from having received that benefit
•
If P has not substantially performed and is in breach, P not permitted to recover
•
Recovery by nonbreaching party
o Nonbreaching party may recover for any benefit conferred on breaching party by
way of part performance or reliance
o Nonbreaching party may not recover restitution if he has fully performed and the
only remaining performance by the other party is the payment of a definite sum of
money
•
Recovery by breaching party
o If D has benefitted from P’s performance, P can recover for benefit conferred less
the D’s damages for the breach
o P generally cannot recover if P’s breach was willful or if K provides that
nonbreaching party may retain the value of the breaching party’s performance as
liquidated damages
2.
Reliance damages (reasonable out-of-pocket expenses incurred by nonbreaching party)
•
Recoverable if nonbreaching party incurs expenses in reasonable reliance upon the
promise that other party would perform
•
Party cannot recover both reliance and expectation damages
E. Specific performance—an equitable remedy possible when damages are an inadequate
remedy
1.
Factors considered in determining whether damages are adequate
•
Difficulty of proving damages with reasonable certainty
•
Hardship to D
•
Balance of the equities
•
Wishes and understandings of the parties
•
Practicality of enforcement
•
Mutuality of agreement
2.
Real property—specific performance granted because real property is considered
unique
3.
UCC—specific performance may be granted to the buyer when goods are rare or unique
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4.
Equitable defenses—laches (prejudicial delay in bringing the action) or unclean hands
(nonbreaching party guilty of some wrongdoing in the transaction) may be raised by
breaching party
F. UCC remedies
1.
Buyer’s remedies—when seller fails to perform or makes a nonconforming tender
•
Failure to tender goods
o Cancel K—if breach of installment K goes to entire K
o Recovery of payments—upon cancellation, buyer entitled to recover payments made
for tender; on rejection or revoked acceptance, also gets security interest in goods
in buyer’s possession
o Damages—market price minus K price plus incidental and consequential damages
o Cover—buyer may purchase similar goods elsewhere and recover replacement price
minus the K price
o Specific performance—for unique goods
o Replevin—buyer can obtain undelivered goods from seller if at least partial payment
is made or the buyer is unable to effect cover
•
Nonconforming tender—buyer has right to accept or reject all or part of the goods
(and the right to inspect before making that decision)
o Rejection—buyer can reject goods if he gives notice to seller within a reasonable
time and before acceptance, and is then entitled to a return of any payments made
or to seek same remedies as if no tender was made
o Acceptance—buyer accepts goods by expressly stating acceptance, using the goods,
or failing to reject the goods; to recover damages, buyer must give seller timely
notice of breach; damages measured by difference between value of nonconforming
goods and value of conforming tender (usually cost of replacement or repair), plus
consequential and incidental damages
o Right to cure—seller has right to cure defective tender if time of performance under
K has not yet elapsed or seller had reasonable grounds to believe that buyer would
accept despite the nonconformity
2.
3.
Seller’s remedies
•
Right to price—seller may recover the full price if buyer has accepted goods;
conforming goods are destroyed or lost after risk has shifted to buyer; seller cannot
reasonably sell identified goods
•
Right to reclaim goods—from insolvent buyer if he makes a demand within 10 days
after buyer receives goods
•
Stoppage of goods in transit—permitted if buyer breaches or is insolvent
•
Wrongful rejection by buyer—seller can collect damages, resell the goods, or
recover the price, and, if the seller is a “lost volume” seller, lost profits; seller can also
collect incidental damages
Risk of loss
•
Unidentified goods—if goods are damaged/destroyed and there is no breach, risk of
loss is on seller until he satisfies delivery obligations (and then risk shifts to buyer)
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o Shipment K—risk of loss passes to buyer when the seller gives possession of the
goods to the carrier and makes proper contract for their shipment
o Destination K—risk of loss passes to buyer when the seller tenders the goods at the
place specified in the K
•
Identified goods—seller is excused if goods are totally destroyed through no fault of
the seller prior to the risk of loss being shifted to the buyer
•
Effect of a breach of K
o Seller’s breach—if seller delivers nonconforming goods, risk of loss remains on the
seller until buyer accepts or there is cure
o Buyer’s breach—if buyer breaches/repudiates after goods have been identified but
before risk of loss shifts, then risk immediately shifts to buyer (to extent of lack of
insurance coverage by seller)
4.
SoL on a breach of a sales K or warranty
•
Four years after cause of action accrues
o Generally, cause of action accrues when breach occurs, regardless of whether
aggrieved party knows
•
Parties may reduce four-year limitations period to not less than one year, but they may
not extend it
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